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The commercial real estate market has in most cases
held up better than the consumer side, but it is possible that the situation is about to
worsen for the business side of the ledger.
One commercial real estate fellow with a fair amount of experience in the Texas market
told us last Friday that his business was in fairly good shape, due to the fact that he
had been very careful in vetting his locations, clients and partners.
Yet, this very level headed fellow also told us that there were definitely some areas in
Texas that were already showing signs of weakness, especially the areas where high growth
of residential housing in the Dallas-Ft. Worth Metroplex had been evident, such as Frisco
and Plano.
Still, not everyone is as sanguine as our real estate mogul. According to The Wall Street
Journal "After suffering a beating from their exposure to home loans, banks and
securities firms are about to take their lumps from office towers, hotels and other
commercial real estate. And the losses could last longer than those from the subprime
shakeout."
Noting that "commercial-real-estate values are starting to slide," the Journal
reported that Goldman Sachs is "projecting a decline of 21% to 26% in the next two
years. That means misery for securities firms with exposure to commercial-real-estate
loans and commercial- mortgage-backed securities."
In other words, at least one Wall Street firm, the one that made money shorting subprime
loans, is now expecting a significant decline in commercial real estate, one of the final
underpinnings of the U.S. economy.
So why is Wall Street suddenly worried about commercial real estate loans? One simple
reason is that there are far fewer commercial real estate loans that have been
securitized. According to the Journal, only some 20-some percent of commercial real estate
loans have been packaged into some kind of security, as opposed to the 80% of mortgages.
That means that there are far more loans of uncertain value out there in commercial real
estate. And that means that it will take longer to value them, write them down, and be
done with the issues that may present.
In fact, according to the Journal: "Wall Street has set itself up for a hard fall in
commercial real estate. Banks and securities firms are facing exposure from loans and
financing commitments made on commercial-real-estate projects, property they own directly
and commercial-mortgage-backed securities that no one wants to buy."
According to what Goldman Sachs told the Journal, investors should expect some "$7.2
billion" in commercial real estate writedowns "by Bear Stearns Cos., Citigroup
Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc., Merrill Lynch & Co.
and Morgan Stanley in the first quarter," as "those firms had combined
commercial-real-estate exposure of $141 billion at the end of the fourth quarter."
And it's possible that although the decline could last longer than that in housing, it may
not be as bad, since "excesses that overtook the U.S. housing market aren't as
prevalent in commercial real estate. Overbuilding of shopping malls, office parks and
other commercial property hasn't been rampant, although vacancy rates are climbing in such
markets as Orange County, Calif., and Las Vegas, which have been hit by the weak housing
market."
Still, if the economy turns down fast and far enough, it is possible that things could be
worse than Goldman analysts expect.
And there is a lot of uncertainty. "So far, default rates on
commercial-mortgage-backed securities are a slim 0.4%. But that is likely to rise as loose
lending standards on some commercial-real-estate loans come back to haunt lenders and
investors. More than $50 billion of five-year, full-term interest-only loans written at
aggressive loan-to-value ratios could turn into defaults "at a significant
level" if the loans can't be refinanced this year, according to Jones Lang LaSalle, a
real-estate brokerage and money-management firm in Chicago."
Conclusion
Last Friday we wrote that "we may be seeing the start of the true unraveling of the
housing boom, the accelerated, "blood in the streets" period that finally
cleanses the market and sets up the next stage, either a base, or some kind of
rally."
Now, it's possible that the economy is in enough trouble to be causing a stall in the
commercial real estate market, a very steady performer during the recent difficult times.
The real question seems to be not if, but when it will happen, and how deep the hole will
be for commercial real estate.
In our opinion, it's unpredictable, and a whole lot depends on those factors passed onto
us by the fellow we curbsided last week.
Thus, it is possible that in contrast to housing, commercial real estate's problems may be
more regional in nature and selective in their damage.
Above all, though, it seems as if the fate of the sector may be more dependent on the
overall state of the economy. And that's where any kind of analysis and future projections
fall into the realm of the very risky. |
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Technical Summary: |
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Specialists Still Selling In 2008
The NYSE specialists were heavy sellers of stock in the latest reporting period, ending on
the week of 2-15. This was the second week of heavy selling by the group and remains a
negative for the stock market. The CBOE Put/Call ratio closed at 1.27 on 2-29-08. This
isn't a bad number, but it seems as if it should be bigger given the bad news that hit the
market. The CBOE P/C ratio for indexes checked in at 1.80 on 2-29. These are moderately
bullish numbers at best.
The VIX and VXN had readings of 26.54 and 28.44. A fall near or below 20 on VIX and
30-40 on VXN is considered negative, a fact that is usually confirmed when the volatility
indexes begin to rise. Readings above 40 and 50, respectively, are often signs that a
bottom may be close to developing.
Market Vane's Bullish Consensus was at 48% on February 29. This survey got to 40% on
January 25th, and the market at least stopped falling for a while after it reached that
key and often bullish number.
The UBS sentiment survey, which is fairly accurate in picking market tops and bottoms
moved to 50% in its latest period after falling to 44.
Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
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